Members of Rops come a cropper

There was certainty and it was possible to advise, in confidence, as to whether such a scheme was a good option for the transfer of benefits in a UK registered pension scheme, or whether a transfer to a Sipp was a better solution.

Now there is considerable uncertainty blighting this area of advice, not least because a change in the relevant legislation is likely to be backdated to 6 April this year, and it is very hard to speculate what those changes might be. The only guidance we have is a desire that the rules operate “as parliament intended”.

But before I explain the current complexities, some background is needed.

The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006, SI 2006/206 define a Rops.

Broadly under SI 2006/206, to be a Rops the overseas scheme had to:

a) be established within the European Economic Area (which means the European Union with the addition of Iceland and Norway and Liechtenstein), or

b) be regulated by a competent regulator in its local jurisdiction, or

c) designate 70 per cent of the UK tax relieved fund for the purposes of providing the member with an income for life at age 55 or later, except in ill-health – the 70 per cent rule – and meet certain conditions relating to taxation.

A Qrops is a Rops that has given certain undertakings to Revenue & Customs. Principally, these undertakings concern reporting requirements relating to member payments arising from transfers in of UK tax relieved funds during the first five complete and consecutive tax years of the member’s non-UK residence and for 10 years following the date of transfer.

In December, HMRC said (Q)Rops members would be able to access flexible benefits from the overseas scheme of which they were a member if local legislation allowed.

It was apparent that the Rops regulations would need to be amended primarily in order to remove the 70 per cent rule

It was therefore apparent that the Rops regulations would need to be amended primarily in order to remove the 70 per cent rule. A draft of amending regulations was published in December 2014 for consultation, setting out a proposal for a new scheme management regulation requirement to replace the 70 per cent rule where the latter applied. Abolishing the 70 per cent rule would have meant that up to 100 per cent lump sums and flexible benefit structures generally, would become possible from UK tax-relieved funds transferred to Rops, where local law permitted.

When the actual amending regulations were laid in March 2015 as The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2015, SI 2015/673, they were expected to modify how a Qrops was to operate and report.

Unfortunately, the anticipated changes simply were not made. It seems the operational aspects were, in the main, delayed because of an inability to determine what, if any, form of additional control needed to be introduced to replace the 70 per cent rule where previously it would have applied.

The effects of the amending regulations on Rops that were published were twofold.

First, the 70 per cent rule was retained on a temporary basis from 6 April 2015. This means, for now at least, full flexible benefits are only possible from EEA-established schemes and where local legislation also permits.This applies, for example, to Qrops in Malta. However, few, if any, Maltese schemes have introduced full flexibility because scheme trustees see it possibly not adhering to the spirit of the legislation, a particular worry in the current environment when there is uncertainty about what is going to happen next.

Second, the age 55 minimum benefit age rule applies to all Rops in relation to funds originating from a UK-registered scheme.

This second point has had huge consequences for the global Rops market. In some jurisdictions, local laws permit access to pension benefits early – before age 55 – and because of this, Rops established in line with these laws no longer comply.

A further Statutory Instrument, which will presumably replace the 70 per cent rule, is expected to be issued in due course. The government wishes the replacement rule to be – in the words of their explanatory note to the amending regulations – “targeted more precisely to ensure that the principles behind allowing transfers to be made free of UK tax can continue to operate ‘as parliament intended’”.

The overall intention is in due course to permit flexible benefits from all Rops jurisdictions in the same way as UK defined contribution pension schemes, where local law allows, but this has not happened yet.

In an interesting development, in the middle of June 2015 HMRC took the highly unusual step of temporarily ‘suspending’ the Rops list, with an announcement that a “reformatted” list would be published on 1 July and that the new list would look “significantly different”. We were not disappointed.

Literally thousands of overseas schemes were removed from the list. All the Australian schemes vanished, with the exception of just one, as expected. 90 per cent of the Irish schemes also disappeared from the list. Some entire jurisdictions are no longer represented. Many of these schemes will have been dormant for years, but in the main will have been removed either because they confirmed they did not satisfy the new stand-alone ‘age 55’ rule, or because they simply did not respond to the HMRC enquiry letter.

A worry for anyone with a client who did transfer to any of the thousands of schemes that were removed between 5 April 2015 and 1 July is that they could be chased by HMRC for having made an unauthorised transfer. The result of this would be a 55 per cent charge on the member’s pension, comprising a 40 per cent unauthorised transfer charge and a 15 per cent surcharge.

It seems that HMRC, working with the authorities in New Zealand, have agreed a relief on this charge for any transfers made to Kiwisaver schemes, but HMRC has given no word on whether people will be pursued for transfers to schemes in other jurisdictions which have now been deemed non-compliant.

But what would have been immensely helpful to see is a change of stance by HMRC on the purpose and use of the list. Specifically, advisers and transferring schemes would find it hugely beneficial if they could rely on it as at least a partial confirmation that the Rops they were considering met requirements. In that regard, the new list is about as useful as the old one, and one wonders what benefit to anyone HMRC sees in its being published at all.

James McLeod is head of pensions of AES international

Key Points

There is considerable uncertainty blighting the area of advice of Rops and Qrops.

Changes needed to be made due to pension freedoms in the UK.

The HMRC published a new list of approved schemes early in July, removing many Rops and Qrops.